Accounting Income Statement EPS should, equity

svgleeson

If diluted EPS is greater than basic EPS then the securities are antidilutive and convertible bonds should not be treated as equity. Why is this?

YAhmed

Diluted EPS accounts for all “dilutive” securities in a capital structure, where a dilutive security is one that would reduce EPS if converted into common equity.
If the effect of a “potentially dilutive” security is not in fact “dilutive” (i.e. its conversion into common equity would NOT reduce EPS to a level below basic EPS) it is ignored from the calculation of diluted EPS.

Valores

Convertible Bonds are still Debt, till the time they are actually converted to Equity, as per their underlying conditions.
Now, when in future they convert to Equity, they have the potential of Diluting the Earnings Per Share, as they will increase the Total Share Base for that Company.
As an Analyst, you have to foresee that situation and calculate Diluted Earnings per Share, as if these Convertible Bonds were converted to Equity. Now, if, after their pseudo conversion, EPS is not lowered than what it is now (the Basic EPS), then effect of conversion is ignored.
That is, that particular security is considered antidilutive, and it will not be considered in calculation of Diluted EPS. Idea is, Investors are interested in the lower of Basic or Diluted EPS. If after a pseudo dilution, it is actually increasing the EPS, then investors know it will not affect their investments in Equity of that Company and they could ignore affect of that security on EPS.
Hope it helps.

ba736

thanks rus1bus. That clarifies it.